Supreme Court agrees to take on Janus case

Overshadowed by Monday’s flurry of blockbuster last-day-of-the-term U.S. Supreme Court rulings was a decision involving Denver money manager Janus that could have a big impact on the securities industry.

On June 28, the court agreed to review Janus Capital Group v. First Derivative Traders, going against a recommendation from the Obama administration that they reject Janus’ petition.

The case dates back to 2003, when Janus was linked to a “market timing” scandal along with other mutual fund companies. The companies were accused of allowing certain shareholders to trade rapidly in and out of their funds, to the detriment of long-term investors. Janus settled with regulators in 2004.

But First Derivative Traders filed a private lawsuit in U.S. District Court in Denver in late 2003. Plaintiffs claim that Janus mislead investors because some Janus fund prospectuses stated that fund managers didn’t permit market timing.

In 2004, the case was transferred to federal court in Maryland, which dismissed it the following year on the grounds that Janus had not prepared the prospectuses nor directly made the allegedly misleading statement. In 2009, the U.S. Court of Appeals for the Fourth Circuit reversed the district court’s dismissal, saying that because Janus participated in writing and distributing the prospectuses, it had effectively made the statement. Janus then asked the Supreme Court to take a look at the case.

At stake is whether Janus can be sued as a primary defendant. Under securities law, private plaintiffs can’t sue secondary players — such as banks, financial advisers and lawyers — for “aiding and abetting” a securities law violation (the Securities and Exchange Commission and the U.S. Department of Justice can, however). Ironically, this dates back to a 1994 case involving two Denver entities, the Central Bank of Denver v. First Interstate Bank of Denver.

If the Supreme Court overturns the 1994 ruling, it could significantly widen the class of defendants who can file private class-action securities lawsuits.

Justices are expected to hear the case in the next Supreme Court term, which begins in October. Stay tuned.